The stock market saw some more upside follow-through yesterday from the big bounce off the lows it saw on Monday, but unlike Monday and Tuesday, the market did not close on its highs for the day. Don’t get us wrong, this is not a big problem, but there is no question that the quality of yesterday’s rally was not as good as Tuesday’s. Volume was lower…and the breadth a bit disappointing. (It was just 1.3 to 1 positive on the S&P 500…and it was actually negative on Nasdaq.)
Again, this does not pose a big problem. After two days where the market jumped strongly, it makes sense that it would lose a little steam on the third day….as long as it regains some of that upside momentum rather quickly. This is important…because if instead of rising further, the market rolls-over in a significant way on the last two days of the week, it would very likely take away a lot of the renewed confidence that has built up in investors minds this week.
This morning, we get the second half of this week’s inflation data…with the PPI number. If you’ll remember, last month the CPI data was met with a bullish reception, but the next day’s PPI number reversed that move completely. Therefore, it will be very interesting to see how the market reacts to the data today.
The reason why today could be an important day is because it can easily be argued that the bounce on Monday and Tuesday was merely a reaction to a very-short-term oversold condition in the stock market. The same can be said about the drop in interest rates yesterday. Let’s face it, the CPI number did not come-in lower-than-expected. It was actually slightly higher than consensus. However, the bond market had become oversold (yields overbought), so it would make more sense to think that this week’s moves in the markets has been something that merely worked off an very-short-term extreme in those markets…and not something that was going to signal a return to the salad days of 2021. This is especially true given that the Fed has gone from providing MASSIVE (record level) stimulus for most of 2021…and now they’re moving to a much more restrictive policy.
Anyway, when we highlighted the potential weakness in the dollar yesterday morning, we didn’t know it would fall out of bed! Not only did the DXY dollar index fall below its key 50-DMA support line…but it ALSO took it below its trend-line from last May (at the 95 level). We do realize that it has only fell slightly below that trend-line, so it could bounce back quickly and avoid giving us confirmation of a change in trend for the greenback. However, there is no question that the dollar is teetering right now…and if it falls further, it should have implications for some other markets.
Not only will a change in trend for the dollar have an impact on commodities (as we highlighted yesterday morning), but it could/should also have an impact on the emerging markets. The EEM emerging markets ETF has rallied strongly over the past two days as the dollar has declined…and it is now breaking one key resistance level…and not far from another.
First of all, the 100 DMA provided very tough resistance in September, October and November…and it broke above that moving average yesterday. The break was not a major one, if it sees anymore upside follow-though, it’s going to be a bullish development for the EEM. We’d also point out that it is testing its trend-line going back to February of last year, so that’s another reason to say that any more upside follow-through will raise the odds that this asset class is going to run.
Having said all this, it will likely take a break above 52.0 to really confirm the breakout. A move above that level would take the EEM above its 200 DMA (which provided resistance in August and September of last year)….AND would give it a “higher-high.” So, that will be the more important level to watch.
Back to the U.S. stock market, this year has gotten off to a very volatile start…and we expect this to continue for the foreseeable future. In fact, volatility could pick back up very quickly…if the stock market reacts to the PPI number in the same way it did last month after that data hits the news-tape at 8:30 this morning.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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